Monthly Investment Update: Volume 6, Issue 4 July, 2013 UNIT LINKED PRODUCTS FROM SBI LIFE INSURANCE CO. LTD. 2008 INVESTMENT OBJECTIVES AND VISION (A) Investment Objectives: The investment objectives of the Company are to maximize the risk adjusted returns and ensure reasonable liquidity at all times. Management of the investment portfolio is a crucial function as investment risk and returns, inter alia, determine the ability of the Company to competitively price its products, ensure solvency at all times and earn the expected profitability. The investment policy outlined in this document seeks to set the direction and philosophy for the Company s investment operations. The Policy outlined below conforms to the IRDA Investment Regulations and the Insurance Act. The Policy covers investment parameters, exposure norms and other relevant factors that will assist in taking prudent investment decisions. The Policy framework also takes into account asset liability management, market risks, portfolio duration, liquidity considerations, and credit risk. To summarize the investment policy aims to achieve the following Investment Objectives: a) To acquire and maintain quality assets that will meet the liabilities accepted by the Company; b) To be able to meet the reasonable expectations of the policyholders taking into account the safety of their funds with optimum Return; c) To adhere to all Regulatory provisions; d) To conduct all the related activities in a cost effective and efficient manner; and e) To achieve performance in line with benchmarks identified for the different investment portfolios. The Company has also defined the Investment Objectives for each Fund separately, on the basis of aforesaid broader Investment objectives. (B) Investment Vision: To invest the funds on the prudent principles of Safety, Liquidity & Returns, with an overall vision of meeting reasonable expectations of policy holders. Source: SBI Life Investment Policy 1
Major Economic Indicators 2
* w e f May 03, 2013 # w e f Feb 09, 2013 Data Sources NSE BSE RBI FIMMDA Bloomberg & Reuters 3
DEBT MARKET REVIEW AND OUTLOOK MARKET REVIEW The benchmark 10 yr. Gsec yields hardened an outrageous 75 basis points in July and all of it coming overnight on 16 th July after the RBI announced first set of liquidity tightening measures to curb speculation and volatility in INR currency. These measures were as a result of record depreciation of INR from ` 56 to `. 60 against Dollar in just one month. The summary of measures is as under: The RBI on 15 th July had announced following unconventional measures 1. Hiked marginal standing facility (MSF) rate by 200 bps to 10.25%. This is the penalty rate at which banks can borrow over Repo rate (7.25%) 2. Restricted borrowing under LAF to 1 percent of NDTL or approx INR 75,000 crores. 3. Conducted OMO sale to draw out excess INR liquidity. On 23rd July RBI introduced additional measures to arrest INR volatility 1. Restricted borrowing under LAF to 0.5 % percent of NDTL per bank from the earlier 1% limit on the overall system. 2. Require banks to maintain 99% of the CRR requirement on a daily basis with the RBI against the existing 70% 3. Conduct 6000 crores of Cash management bills These measures, intended to reduce the rupee volatility, not only pushed the short end yields but also longer tenor yields. The Quarterly Monetary policy statement announced on 30 th July re-iterated the risk emanating from the global development and the weakening of the CAD (Current Account Deficit). While the report acknowledged moderating inflation and reduced growth, it stressed on the stable macroeconomic environment as a prerequisite condition to bring back growth in a sustained manner. Markets expected RBI to hint that the measures announced to be temporary but RBI chose not to give any time lines for reversal and made it dependent on future data. It also ruled out the possibility of rate hike, but warned of all possible arsenals to be used in future to reign in the rupee volatility. Key rate movements are as under: Instrument Jul '13 Jun '13 Mar '13 Mar '12 Change MOM Change (YTD) 10 Yr Gsec 8.33% 7.61% 7.95% 8.57% 0.72% 0.38% 30 Yr Gsec 8.74% 7.86% 8.17% 8.74% 0.88% 0.57% 3 Yr AAA Bond 10.00% 8.60% 8.80% 9.60% 1.40% 1.20% 5 Yr AAA Bond 9.75% 8.65% 8.85% 9.50% 1.10% 0.90% 10 Yr AAA Bond 9.45% 8.56% 8.85% 9.45% 0.89% 0.60% 364 Days T-bill 10.46% 7.46% 7.80% 8.48% 3.00% 2.66% 91 Days T-bill 11.26% 7.48% 8.10% 9.02% 3.78% 3.16% 1 Yr Certificate of Deposit 9.85% 8.30% 9.25% 10.35% 1.55% 0.60% Credit spreads 95 81 75 69 6 20 Crude $/barrel 107 102 110 103 5-3 (Source: Bloomberg, Reuters & RBI) 4
Macro Indicators The IIP saw a drop of 1.6% in May 2013 vs. the revised 1.9% in April 2013. The mfg sector showed a decline after few months of positive movement. The mining sectored continued in red. The electricity generation saw a growth of 6.2%. Within the use based classification Capital goods saw a decline of 2.7%. The biggest drop being in the consumer durables contributed by the drop in motor vehicles segment (-6.2%). Industry Classification May-13 Apr-13 Use Based Classification May-13 Apr-13 Mining -5.7-3 Basic Goods (45.7) -0.4 1.3 Manufacturing -2 2.8 Capital Goods (8.8) -2.7 1 Electricity 6.2 0.8 Intermediate (15.69) 1.5 2.4 IIP -1.6 2 Consumer (29.81) -4 2.8 of which Durables (8.46) -10.4-8.3 Non Durables 21.35) 1.7 12.3 WPI for June 2013 came lower at 4.86% (May WPI 4.7%) and the core inflation dropped to 2.10% y-o-y. The food inflation increased from the previous month, the mfg inflation dropped on back of low demand) and the fuel inflation remained flat. The June CPI came in at 9.9% vs 9.2% in May 2013. The CPI was higher because of the food inflation which was up 10.84% The trade deficit narrowed in June 2013 to $12.2 bn compared to $20.1 bn in May 2013. The reduction of trade deficit was on back of lower gold and oil buying. At the aggregate level the exports contracted by 4.5% and imports narrowed by 0.4%. The Gold imports were down to 30 tonnes from 160 tonnes in May 2013. Global News: The world Economy is in balance as far as growth is concerned. The developed market has shown growth in the second quarter while the emerging economies, largely China, have show signs of growth slowing down. The US has led the way in terms of the annualized Q2 GDP growth coming in at 1.6% vs the expected 1%. Though the consumer confidence index has not fared well but there is definite drop in the unemployment rate. This would also mean that the anticipated tapering of the QE3 is on course in September. The ECB left its policy rate unchanged at 0.50% and the ECB President has re-assured the market that the monetary policy will remain accommodative till warranted. The Euro-Zone consumer confidence surveys are encouraging. After a long time, since Apr 2011, the unemployment rate fell down in Jul 2013 though in percent terms it remained high at 12.1% 5
DEBT OUTLOOK The RBI Governor in his post policy conference stated that India is currently facing the impossible trinity. While we are in midst of falling growth, lower inflation trajectory and we need to reduce rates but the pace of currency depreciation requires immediate attention. The immediate reason for currency depreciation can be attributed to rise in yields in US and expected tapering of US stimulus; however the weakness is likely to prevail due to weak domestic macro factors and high Current account Deficit (CAD). In the past India was able to fund its huge Current account deficit via record FII flows and FDI however with weak global growth and deteriorating macro fundamentals, funding a high CAD on a sustainable basis is becoming increasingly difficult. Due to this dilemma arising from weak growth and benign core inflation on one hand and depreciating currency on other hand the signaling of rate hike has not come through the conventional Repo rate or CRR, but RBI has resorted to keep the cost of liquidity high and thereby caused interest rates to rise indirectly. Given the scenario and the limited options available with the government to bring in more foreign currency in short term, we do not expect RBI to reduce short term rates in hurry. Post the measures announced on 15 th July Rupee has not appreciated and we expect some more measures coming from RBI if the current sets of measures don t bring the desired effect. Having said that both RBI and the finance ministry are also aware of the ill effect of higher rates on already weak growth and hence we expect some measures to bring in foreign currency by way of ECB flows, INR sovereign bond issue etc which will be announced soon. Yield have gone up by 75 basis points in one month and this provides opportunity for investors with longer horizon to invest or stay invested in bond markets to take advantage of current higher yields and participate in capital gains once the rates fall. EQUITY OUTLOOK Sensex showed resilience against bout s of bad news to finally fall during the month. Reserve Bank of India announced a slew of measures to curb rupee volatility. Federal Reserve Chairman Mr. Ben Bernenke announced tapering off for the quantitative easing program that started aftermath the financial crisis. Rupee depreciated sharply. Sensex gave off 0.26% during the month to end at 19,396. It underperformed most of developed market indices like the Dow Jones (up 3.9%) & the FTSE 100 (up 6.5%). There was a clear delinking here. Within the index itself, we see clear difference between stocks that performed and the one that did not. Stocks that withstood the fall in indices are a very few. Government tried its best to defend the fall in rupee. Reserve Bank of India tightened the noose. Overnight rates went up 200 basis. Amount to be borrowed on overnight basis was cut to 0.5% of the Net Demand and Time Liabilities for the banks. Cash reserve ratio maintenance was restricted to daily basis instead of on a reported day. As a result we see inverted yield curve. This would result in increase in cost of borrowing on short term substantially. President cleared the Food Security Bill that gives legal right for 67% of the population for subsidized grains every month. In the process of garnering forex reserves government relaxed the FDI norms for 12 sectors including the telecom and the insurance. 6
RBI also took further steps to curb gold imports with CAD in mind, in addition to rupee. It restricted gold imports to entities that would export 1/5th and imports to be made available only for making jewelry. Rupee though fell 1.6% during the month. Data that came out during the month in terms of manufacturing PMI (for the month of June at 50.1%), exports (fall at 4.6% for the month of june on YoY basis), Index of Industrial production (negative 1.6% for the month of May, yoy) and core sector growth (0.1% for the month of june) indicates complete collapse of demand across the sectors. Many institutional houses have downgraded their forecast GDP growth on the back of measures that RBI had taken. Even though the monsoons have been good, we clearly see growth slowing. With increased cost of borrowing and lack of confidence in corporate India to set up new projects that is eminent in loan growth by the banking system, we turn negative on the markets and expect them to correct in the coming month. Results and the forecast / outlook given by managements supports our arguments for being negative. Disclaimer: 1) This newsletter only gives an overview of economy and should not be construed as financial advice 2) SBI Life Insurance Co. Ltd however makes no warranties, representations, promises or statements that information contained herein are correct and accurate. Please consult your Advisor/Consultant before making the investment decision 7